Sweden’s central bank hikes interest rate

Sweden's central bank, the Riksbank, has hiked its interest rate by 0.25 percentage points to 1.5 percent and at the same time increased its forecast for future interest rates.

Sweden's central bank hikes interest rate

“They raised rates as expected and they also raised the repo rate quite properly, which we think is correct and also was expected by the market,” Annika Winsth, chief economist at Nordea, said regarding the Riksbank’s announcement.

According to Winsth, the Riksbank is expressing the view that the Swedish economy is developing stronger than global markets.

“That is what we have seen since the last meeting, that it is stronger than the US, for example. And they have realised this, so that is why they made this decision and we think that is correct and proper,” she said.

The Riksbank also revised up its forecast for the development of its key interest rate. In the second quarter the repo rate is expected to average 1.7 percent, an upward revision from the December assessment of 1.6 percent.

In the first quarter of 2012, the rate is forecast to be 2.5 percent compared with 2.2 percent. In the following year, the Riksbank anticipates having raised interest rates to 3.6 percent.

The decision to raise rates on Tuesday was not however unanimous among members of the Riksbank board.

Two members of the Riksbank’s executive, Karolina Ekholm and Lars E.O. Svensson, expressed their reservations against the decision to raise rates, as well as the decision to write up the trajectory of the interest rate.

“So there is a divided view on the executive board,” Annika Winsth concluded.

The Riksbank expects GDP to grow by 4.4 percent this year, unchanged from the previous forecast. GDP is seen rising by 2.4 percent in 2012, a marginal upward revision. The following year, GDP is expected to increase by 2.5 percent.

The bank has also revised its inflation forecast, with CPI (Consumer Price Index) at 2.5 percent this year compared with the previous forecast of 2.2 percent. In 2012, inflation will reach 2.1 percent compared with the previous 2 percent, then rising to 2.6 percent in 2013.

“International growth is contributing to rising energy and commodity prices. The higher prices temporarily push up inflation in Sweden, but are also expected to indirectly continue affecting inflationary pressures throughout the forecast period,” the Riksbank wrote in a statement on Tuesday.

However, the stronger Swedish krona has contributed to dampening underlying inflation.

The Riksbank has also revised its estimates on unemployment. It now expects the unemployment rate at an average 7.3 percent this year, 6.8 percent next year and 6.4 percent in 2013, 0.2 percentage points lower than the previous assessment for all three years.

Market interest rates fell, while the krona strengthened against both the euro and the dollar immediately after the Riksbank’s interest rate change and revised forecast were announced.

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Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”